Franchisor’s restraint of trade covenant held to be unenforceable 

A franchisor has been told by the High Court that its restraint of trade provisions in a franchise agreement were unenforceable. 

Sam Lyon Head of Corporate & Commercial reports on this recent case.

Dwyer (UK Franchising) operated an emergency plumbing and drainage franchise business. In September 2018, an individual trading as Fredbar entered into a 10-year franchise, which would be his sole source of income. 

He had a mortgage on the family home and few assets. He had no previous experience in the plumbing and drainage business, but attended a course provided by Dwyer. 

Fredbar received financial projections based on averages obtained from Dwyer’s other franchises. There was no research specific to the area where Fredbar lived. 

The agreement contained a post-termination restriction preventing franchisees from being involved in a competing business for one year, post-termination. 

Fredbar paid the franchise fee and began trading in January 2019. The business was substantially less profitable than had been indicated by Dwyer’s projections. 

In July 2020, Fredbar terminated the agreement. He began to operate a competing business within the franchise territory. Dwyer issued a claim against him. 

The judge had to determine the reasonableness of the covenants by considering the factual and contractual background and the relative bargaining strength of the parties. 

Dwyer was the largest emergency plumbing and drainage company in the country with more than 30 franchises, whereas Fredbar was an individual who had invested all his savings in the business and borrowed money from the bank. 

Dwyer had been aware that Fredbar had no previous experience. He had been presented with a standard form agreement which had to be accepted or rejected. 

Given the inequality of bargaining power that undoubtedly existed, the franchise agreement was more akin to a contract of employment than to a contract for the sale of a business. 

On this basis, the judge concluded that the restraint of trade provisions were unreasonable and unenforceable.  

If you would like more information about the issues raised in this article or any aspect of company law, please contact Sam on 01228 516666 or click here to send him an email.